From Briefing.com: Close Dow -52.54 at -10544.90, S&P -4.04 at -1227.16, Nasdaq -22.42 at -2149.33: The market closed near session lows as renewed concerns about rising oil prices underpinned a sense of nervousness, igniting another round of profit-taking that closed seven out of ten economic sectors to the downside... The trading day began on shaky ground, with the major indices split and vacillating around the flat line, as tepid, nonchalant reactions to the morning's varied economic data provided little conviction on either side of the aisle...
Retail Sales for Aug. (declining 2.1% vs. an expected 1.4% slide), marking the largest decline in nearly four years, accompanied the opening bell. That headline snatched the market's attention and overshadowed a stronger-than-expected read on sales excluding autos (+1.0% vs. 0.5% consensus) that suggested underlying demand remains strong. Overall, however, the market's response was a relatively muted one, waiting for September reports to include the Katrina effect...
With regard to sector performance, Consumer Discretionary again turned in the day's worst performance, bogged down by the dual effects of surging energy prices and the mixed retail sales report. Crude prices ($65.20/bbl +$2.01) moved north, opening higher and spiking throughout the afternoon following larger than expected declines in weekly crude oil and distillate inventories. To that end, retailers (-1.1%) languished and extended a 1.9% year-to-date decline. Consolidation in leaders like Boeing (BA 64.18 -1.22 ), United Technologies (UTX 50.96 -0.56) and Caterpillar (CAT 58.30 -1.10), analyst downgrades of Pall (PLL 28.20 -1.76) and Allied Waste (AW 8.38 -0.78), and a disappointing read on industrial production weighed on the Industrials sector. Aug. industrial production rose just 0.1% as the Fed noted that Katrina reduced industrial output by 0.3%. Technology was a more influential leader to the downside, as losses of at least 1.5% from leaders like Intel (INTC 24.49 -0.41), Cisco Systems (CSCO 17.84 -0.41) and Oracle (ORCL 13.44 -0.20) weighed on the semiconductor, networking and software groups, respectively, offsetting new 52-week highs from Motorola (MOT 23.87 +0.42) and Micron Technology (MU 13.23 +0.55)...
Despite a stronger than expected Q3 (Aug) report from Lehman Brothers (LEH 112.41 +0.13), weakness in the Treasury market, which lifted yields on the 10-year note (-9/32) to 4.16%, diminished the desire to own interest-rate sensitive issues like brokers and banks weighed on Financial. Bonds were weak following mixed retail sales data and some uncertainty heading into tomorrow's CPI report... Late in the session Healthcare erased an early gain that was fueled by drug distributors' rise on the back of upgraded Cardinal Healthcare (CAH 60.60 +0.70) and AmerisourceBergen (ABC 75.88 +0.49)...
Energy (+1.1%), however, extended its 34% year-to-date gain, benefiting from the 3.3% surge in oil prices. Utilities (+0.5%) and Materials (+0.3%) also chalked respectable gains. Shares of TXU Corp.(TXU 103.70 +2.59), flirting with a 52-week high, and a 2.4% surge in Sempra Energy (SRE 45.90 +1.07), which was started with a Top Pick rating at RBC Capital, helped the dividend-paying stocks shrug off rising bond yields. The Materials sector (+0.4%) benefited from weakness in the greenback and a 3.9% rise in Newmont Mining (NEM 43.94 +2.20), which also sent the gold industry group (+3.4%) to the top of today's best-performers list...DJTA -0.2, DJUA +0.6, DOT -1.1, Nasdaq 100 -1.1, Russell 2000 -1.0, SOX -0.9, S&P Midcap 400 -0.4, XOI +1.2, NYSE Adv/Dec 1184/2068, Nasdaq Adv/Dec 989/2013
4:04PM California Micro raises Q2 guidance (CAMD) 8.25 -0.15:Co expects Q2 (Sep) revenues to be between $16.5-17.5 mln, Reuters consensus is $16.46 mln, previous guidance was $16-17 mln. EPS is expected to be between $0.05-0.06, consensus is $0.04, compared to previous guidance of $0.04-0.05. Co states, "We have raised our Q2 revenue and earnings guidance as a result of a stronger than expected demand from our mobile handset customers. Revenue from our personal computer and digital consumer electronics products will be down sequentially due to a decline in demand for older products. Although this decline will be more rapid than expected, it will be more than offset by the greater strength in demand from our mobile handset customers." Co noted that so far this quarter bookings are significantly stronger and design win activity slightly stronger than in Q1.
3:06PM Semiconductors Hldrs Trust nearing support at 37.12/37.07--session low 37.15 (SMH) 37.16 -0.24: -Technical- The Semi HOLDR is at a fresh low and is nearing support at the top of the late Aug range/breakout point and this week's low at 37.12/37.07.
8:39AM DiamondCluster names new CEO, COO (DTPI) 9.88 :Co names Adam Gutstein as CEO, and Jay Norman as President and COO, effective April 1, 2006. Norman will also serve on company's Board. As previously announced, on April 1, 2006, Mel Bergstein will step down as CEO as part of planned succession and remain chairman of DTPI's Board.
ScanSoft (SSFT) collaborates with Microsoft (MSFT) to enable professional scanning and document conversion for the new Microsoft XPS document format...
Electroglas (EGLS) announces that an Electroglas EG6000 300mm wafer prober has been installed in the Teradyne (TER) Application Engineering Center in Hsinchu, Taiwan...
2:48PM CEC Entertainment (CEC)
31.55 -2.93: CEC Entertainment, parent of the Chuck E. Cheese pizza chain, saw its shares plummet as much as 15% during the regular trading session after the company updated its guidance late Tuesday, due to the impact of Hurricane Katrina. The Irving, Texas-based company said the storm shuttered 17 of its company-operated stores - five of which remain closed - and that it has lost approximately 128 store operating days.
Meanwhile, CEC said sales are faltering. Through the first ten weeks of the third quarter, comparable store sales are down 5%, compared to a 2.1% decline in the second quarter and a 0.4% increase in the third quarter. The company believes the current sales trend reflects the impact of higher gasoline prices on consumer spending, as well as ineffective marketing promotions and "to a lesser extent, the loss of store operating days resulting from Hurricane Katrina."
As a consequence of these factors, the company lowered its earnings forecast for the third quarter to a range of $0.43 to $0.47 per share - the second downside revision in less than two months. The company had previously projected earnings between $0.56 and $0.61 per share while analysts, on average, were expecting $0.56 per share.
Furthermore, given the uncertain consumer environment - largely due to higher fuel costs - and the difficulty in estimating the residual impact of Hurricane Katrina, CEC refrained from updating its full year sales guidance. However, it said it will offer guidance for the fourth quarter when it releases third quarter results on October 25. As such, investors should not rely on previous earnings guidance for the period, which stands at $0.42 to $0.44 per share.
Although much emphasis has been placed on the impact of Katrina on operations, CEC's struggles were largely in place before the storm devastated the Gulf Coast. Specifically, the effect of higher gas prices, which topped $3.00 a gallon in most places after Katrina hit, has gradually taken its toll on consumers, particularly on younger families with less disposable income. In addition, the current sales shortfall can be attributed to the poorly received "Super Chuck Summer" promotional campaign in the month of June. Despite its name, the promotion was anything but super, as less than 1% of the company's total sales came from the new kid's meal program. Consequently, the program was pulled two months ahead of schedule and left the company without a coordinated marketing promotion in the third quarter.
Given CEC's current sales weakness and rising fuel costs, it is difficult to justify a buying opportunity on the currently depressed price level. Although the concept has proved its longevity in an extremely difficult market, the impending competitive and macro challenges facing the company undermines the investment proposition. While a new promotion may help to fuel traffic and sales, lingering pressure on disposable consumer income is concerning for growth prospects. --Richard Jahnke, Briefing.com
11:11AM MDC Holdings (MDC)
78.77 -0.42: On the strength of its record second quarter backlog and current home order growth, homebuilder MDC Holdings on Wednesday said it expects earnings for the full year to surpass the average analyst estimate of $10.39 per share. However, as a result of construction delays in Arizona and Nevada - two of the nation's strongest housing markets - the company added that earnings for the current quarter (Q3) may fall short of the lowest estimate of $2.65 from analysts, but should exceed the $2.36 per share it earned last year. The consensus EPS estimate is $2.79, according to Reuters Estimates.
"In Arizona, labor and material shortages have extended significantly, without prior notice from suppliers, the lead times for ordering various home components, particularly cabinets, thereby delaying the completion of sold homes. In Nevada, the company recently has been notified by the local power company that their scheduling of needed electrical hookups for five of the company's new communities, in which approximately 170 sold homes have been completed, has been extended, thereby delaying the closing of these completed homes until October."
The company said approximately 450 homes in the region, representing $125 million in revenue, will be delayed to the fourth quarter and limit home closings to about 3,750 in the quarter. However, management expects the delays to be recovered in October and November and anticipates earnings growth in the fourth quarter to more than compensate for any shortfall in the current period. "Management's expectations assume no unforeseen effects from the hurricane in the Southeast."
Notwithstanding the cautious profit outlook, strong demand for new homes, coupled with increases in selling prices, continues to support the homebuilder's prospects. The company reported that home orders in July and August grew to 2,624, up 33% from 1,974 home orders in the same period last year, led by California and Nevada. In addition, it continues to experience higher orders from its newest markets in Florida, Delaware, Utah, and Illinois.
Against a favorable economic backdrop, highlighted by relatively low interest rates, steady job growth, and strong demographic trends, MDC has delivered handsome returns to investors in recent years. While broad conditions remain intact, and the homebuilding sector stays hot, the company is well positioned to outperform. MDC continues to experience accelerated growth in its key markets in the Southwest and has sustained significant pricing power and margin expansion, as evidenced by its record second quarter. To this end, MDC remains one of the more enticing stocks in the homebuilding sector. At current prices, the company trades at 7.5x the FY05 EPS estimate of $10.39, as compared to 8.5x for Ryland Group (00C) and 7.1x for Beazer Homes (BZH), two constituents in the small-cap homebuilding group. --Richard Jahnke, Briefing.com
10:48AM Lehman Bros. (LEH)
113.85 +1.57: Lehman's third quarter results magnanimously demonstrate its successful transformation from being just a big bond house. Per share earnings surpassed consensus by a whopping $0.59 as the street underestimated contributions from its equity sales and trading franchises, along with strong market share gains in investment banking. The quarter represented its best-ever revenues and earnings in the US and its second best quarter ever internationally. There were many best-ever achievements in the third quarter as Lehman diversifies its business into a full service investment brokerage house.
Net income came in at $879 mln, or $2.94 per share, up 74% from $505 mln, or $1.71 per diluted share last year. Earnings for the first nine months of the year reached an all-time record for the company of $2.4 bln, up 37% y/y. Lehman blew away expectations by almost half a billion dollars with total revenues of $3.9 bln, up 47% y/y and 18% q/q. As expected, Investment Banking revenues were extremely strong, up 55% y/y to $815 mln, achieving its highest quarter ever driven by debt underwriting and assisted by improved credit spreads and derivatives, equity underwriting and M&A activity. Lehman has become a powerhouse in investment banking as it advised on three of the largest transactions during the quarter.
Capital Markets revenues jumped 49% to $2.5 bln - the second highest level ever. Fixed income revenues accounted for $1.9 bln equating to a rise of 37% as Lehman was able to manage the flatter yield curve environment successfully. The top line was driven by continued strength in residential and commercial mortgages and real estate. Lehman's equity business continues to gain momentum with revenues almost doubling from last year to $637 mln. This quarter business was driven by robust customer flow in cash business and equity derivatives. Investment management generated a 29% increase in revenues to $511 mln, ending the quarter with $164 bln in assets under management - again the highest ever.
Lehman's standout performance sets the bar high for the rest of the brokers to follow later in the week. Its fixed income results bode well for Bear Stearns (BSC), which reports earnings on Thursday. Once again, the street was behind the curve in forecasting the earnings power within its own industry. With Lehman being first out of the gate with a blowout quarter, analysts will likely raise full year earnings expectations for the rest of the group.
Under every earnings metric, Lehman's results were without fault. It's also interesting to note that Lehman Bros., whose beginning dates back to the mid-1800's in commodities trading, achieved record results without the assistance of the super-hot commodities markets. Unlike its peers, such as Goldman Sachs (GS), Lehman is underexposed in this area. Looking ahead, Lehman's pipeline looks solid, led by M&A and an improved outlook in equity underwriting. Further, it continues to build out its investment banking and equities business, particularly in Europe, which should bear fruit in the near-term. --Kimberly DuBord, Briefing.com
8:56AM Page One - Market Steadies
Stock futures indicate a near flat open this morning. The tone was decidedly negative yesterday, and the market may be choppy for a few weeks, but it isn't going to turn into one-way market.
The news this morning is mixed. Oil prices are up about $0.40 but at $63.50 are holding at a level that isn't causing great consternation in the market.
August retail sales were reported to have fallen 2.1% but that followed huge gains of 1.8% in July and 1.7% in June. A decline of 1.4% had been expected. Auto sales were up sharply in June and July on "employee discount" pricing promotions, and have now fallen back.
Excluding autos, retail sales were up a very healthy 1.0% in August. That follows gains of 0.5% in July and 0.9% in June. The trend in underlying demand is very strong. This data is, of course, pre-Katrina, however, and thus will be somewhat discounted. The market is looking to post-Katrina data for an indication of trends for the months ahead. The retail sales data this morning did not have much impact on futures trading.
The big corporate news is the Wall Street Journal article saying that both Delta and Northwest could file for bankruptcy as early as today. Lehman Brothers reported earnings of $2.94 a share. That was a whopping $0.59 ahead of expectations. Brokers often have volatile earnings and can beat expectations by a lot. It may boost the sector some, but won't have broad impact.
August industrial production data will be out at 9:15 ET today, and the weekly oil inventory data will be reported at 10:30 ET. Tomorrow, August CPI will be out. Tuesday of next week is the Fed's FOMC meeting. Expectations have returned for another 1/4% rate hike but there is some talk the Fed might hold off at this meeting. -- Dick Green, Briefing.com
9:48AM Stage Stores (STGS) Lehman Brothers initiates OVERWEIGHT. Target $34. Since emerging from bankruptcy in 2001 under new mgmt, firm says STGS has made impressive strides in turning around its business. Firm notes that the co has a unique mkt positioning, as 82% of its stores are located in areas with less than 150k people, with limited competition.
9:47AM Accenture (ACN) Moors & Cabot initiates BUY. Target $30. Firm thinks consensus ests are too low and they believe the Street does not fully appreciate the positive margin implications of the co's industrialization/standardization programs and offshore capabilities. Firm also thinks concerns about offshore and recent weakness in outsourcing bookings as overblown.
9:47AM Kroger (KR) KeyBanc Capital Mkts / McDonald upgrades Buy to AGGRESSIVE BUY. Target $25. KeyBanc upgrades KR following Q2 results, noting the co's EPS grew more than 28% while comps rose 5.7%, accelerating an already strong rev progression. However, they believe that other events in yesterday's stock mkt distracted investors from what they consider excellent operating results.
9:46AM First Bancorp (FBP) Moors & Cabot initiates HOLD. Target $17.5. Moors & Cabot initiates FBP with concerns stemming from the co's poorer quality earnings associated with purchase mortgage and IBE leverage strategies, and the organization's more recent accounting issues.
9:45AM Apple Computer (AAPL) Needham & Co reiterates BUY. Target $52 to $57. Needham raises their AAPL tgt based on the following: 1) a more profitable iPod financial model following the introduction of the iPod nano; 2) a more profitable software revenue stream than we previously assumed; and 3) a larger free cash position.
9:44AM Advent Software (ADVS) Janney Mntgmy Scott initiates BUY. Firm believes ADVS has a winning strategy: an installed base of satisfied clients, high client retention rates, recurring revenues, and a culture based upon technology innovation. Although underrepresented within larger asset managers, they say ADVS has an excellent foundation to move up-market with its next generation of accounting software due to be released by the end of 2005.
9:43AM Hot Topic (HOTT) Morgan Keegan upgrades Underperform to MKT PERFORM. Morgan Keegan upgrades HOTT based on conservative earnings guidance as well as a slight improvement in the fundamental business. They believe that the higher level of promotional activity is now being offset by a very slight increase in traffic.
9:42AM Dominion (D) Bernstein upgrades Mkt Perform to OUTPERFORM. Target $78 to $110. Bernstein upgrades D and raises their 2007-08 EPS ests. Firm says the impact of this summer's increase in forward prices for both power and gas is strongest on their EPS ests for 2007-08, when the hedges on D's oil and gas production roll off and current contracts for the output of the co's New England power plants expire.
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